With gloomy bottom lines hanging over insurers’ heads, some analysts are predicting a renewed interest in outsourcing as a cost-saver – among both insurance giants and smaller domestic insurers with less outsourcing experience.
But that path is fraught with potential long-term trouble, and other industry observers counter that the industry’s financial position is, in fact, putting insurance companies into a “wait-and-see” mode, or focusing their cost-cutting elsewhere.
A number of companies are occupied with how best to run leaner after a dismal 2008 and a shaky-looking 2009. Professional services firm Ernst & Young brought up outsourcing as a potential way to cut costs in an industry outlook for the upcoming year.
Important pieces of the business, like actuarial support, claims, and billing and collections are some of the likeliest activities to get farmed out, according to the report.
John Varricchio, a principal in the insurance sector of Ernst&Young’s Financial Services Office, said softening markets and negative investment portfolios will push insurers to consider a host of cost-cutting measures – including outsourcing. International insurance giants have long experience with outsourcing, but Varricchio says he’s seen smaller, domestic players look to get further into the game.
“It’s happening at different paces at different companies,” he said; some companies will farm out more work because they have to, others are looking into it because it makes good long-term sense for them.
Pros And Cons
If a company wants to expand into a new market, setting up third-party contracting in a new region or country helps develop roots in that area and opens the door to eventually creating a subsidiary operation there, he said.
But others say insurers are pulling back from such a move.
“The industry has moved into a general state of decision avoidance,” said Doug Brown, co-author of The Black Book of Outsourcing, speaking specifically of international outsourcing.
True, insurers would possibly save money by moving some operations offshore, but a host of other factors are making them nervous about doing so. The current risks inherent in some offshore destinations have spiked upward – terrorism, corruption and data security are making companies rethink moving overseas, particularly to outsourcing’s favorite destination, India.
Insurers are particularly anxious about data breaches; because these companies deal with sensitive customer information, they don’t want to work with international companies whose practices aren’t viewed as safe and certified, Brown said.
But even as far as the economy is concerned, the jury’s still out as to whether insurers will ramp up outsourcing, said Katherine Burger, editorial director of Insurance & Technology publication. More insurers are currently concerned with getting snappier execution of their current systems, not in trying to ship off sections of their business.
“Are [companies] suddenly going to be slashing IT staffs and workforce and moving everything offshore? I don’t think that’s going to happen,” she said.
Besides, outsourcing has extensive barriers – it’s a complicated process, and although the company might see cost-savings up front, those savings diminish over time.
Also, she said, it may become politically risky to make such a move.
A few years ago, offshoring was seen as a black mark against companies who moved jobs overseas. With the U.S. job market in its current state and unlikely to turn around immediately, offshoring could rise up as a familiar villain, and damage the reputations of the companies that do it.
“Companies that are considering offshoring are going to have to be really smart about making the business case, demonstrating the benefits … and explaining why they’re doing it and why it’s necessary for their survival,” Burger said.
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